6. Alternatives to EU membership do not offer greater advantages or influence for the UK

Chapter 6

Chapter 6: Alternatives to EU membership do not offer greater advantages or
influence for the UK

Any objective assessment of the UK’s relationship with the European Union as a
component of its global future requires consideration of potential options for the
UK as alternatives to membership. A number of alternative types of relationship with
the EU have been proposed.

Some argue that the UK is best served by severing all formal links with the EU and
going it alone, on the basis solely of membership of the World Trade Organisation
(WTO), refocusing UK trade towards fast-growing markets and the Commonwealth.
Advocates of halfway house options believe that the UK must leave the EU but remain
closely intertwined, by joining the European Economic Area as Norway has done, by
creating a framework of bilateral agreements as Switzerland has done, or by entering
the customs union as Turkey has done. Others suggest a ‘UK–EU Free Trade Area
option’ where the UK, on leaving the EU, negotiates its own relationship through a
Free Trade Agreement with the EU.

None of the alternative options can combine all of the benefits of EU membership with
none of the costs. Such solutions are simply unrealistic. Whatever the nature of the
UK’s relationship with its major trading partner, there will be a trade-off between
what the UK wants and what the price of the trade to get it is. For businesses, the
important test should be how each alternative option impacts on the economic factors
that boost competitiveness and productivity, and the UK’s ability to influence these
factors in its interests.

Attempting to change the terms of the UK’s relationship with the EU and seeking to
establish a new relationship would create risks. Assessing alternatives is by nature
speculative because predicting the consequences of a changed relationship is
difficult. A UK departure would be such a large and complex event, it is impossible
to say with certainty what the impact would be. However, British businesses are used
to relating to future uncertainties and risks are an inherent part of doing
business: they cannot be avoided, but they can be identified and evaluated.

While the UK could undoubtedly survive outside the EU, exploring the details and
inherent risks of some of the alternatives to EU membership shows that none of the
alternatives offers a clear path to an improved balance of benefits or greater
influence over the terms of UK interaction with its nearest neighbours. It also
offers a challenge to those arguing the UK would be better off out of the EU:
creating a credible alternative means providing not only a detailed description of
how the alternative ensures the right conditions for the UK but also a detailed plan
for how best to achieve it that takes into account the risks involved. Only then can
there be a credible, open debate about alternative options for the UK’s relationship
with the EU.

6.1 Leaving the EU is legally possible, but an assessment of alternatives must focus
on how each would support British business in realising its global future

Exhibit 61: Leaving the EU – a break-up in four steps

The EU Treaty has an ‘exit clause’, first set out in Article 50 in the Treaty on
European Union, which sets out the basic steps for a withdrawal.

The member state wishing to leave informs the other member states of its
intention.

The other member states create guidelines for the negotiation between the EU and
the leaving member state.

The leaving member state and the EU begin negotiating a treaty framework, a
so-called ‘withdrawal agreement,’ which will regulate the time frame and
details of the ‘divorce’. The two parties have two years to finalise
negotiations.

If the two parties agree, the country is allowed to exit the EU on the terms of
the withdrawal agreement. If there is no agreement, after a two-year notice period,
the leaving member state will simply then no longer be bound by the Treaties, and
the other member states will not be bound by their various Treaty obligations to the
leaving member state.

It is practically possible for the UK to leave the EU but it is uncharted territory with no
guarantees for a future relationship. A UK withdrawal from the EU is legally possible and
would be effected through the ‘exit clause’ in the Lisbon Treaty, following the steps in Exhibit
61. Although might seem a straightforward process, leaving the EU would involve a
number of uncertainties because the two parties would be dividing after a 40-year long
relationship. No one can therefore describe with certainty how an exit would look and
the impact it would have on the UK. The exit terms are up for negotiation, and there is no
guarantee of securing a favourable future UK relationship with the EU.

Were negotiations with the EU over the withdrawal agreement to fail, there would be a risk that the UK could find itself outside the EU
involuntarily with no access rights to its markets. The Treaties have an in-built notice period stipulating that
the UK would no longer be bound by the Treaties from
the date provided for in the withdrawal agreement or,
failing that, two years after notification of its intention
to withdraw. This provision is a safeguard for both the
EU and the leaving member to make sure that no party
holds up negotiations, but there is a risk: failure to
reach an agreement would mean that the UK would
be automatically ‘out’ within two years. Departure
becomes automatic even if the question of the future
relationship unresolved.

As the exit clause has never been used, there are a number of uncertainties related
to the process. The ‘withdrawal agreement’ would set out the process and the
practical realities of an exit (the transitional measures that would wind down the
UK’s EU obligations) and benefits. But the content of this agreement is not
straightforward. It would, for instance, have to set out and solve the logistics of
the UK’s budget contributions while phasing out EU funding to UK regions and UK
participation in various EU programmes, remove the UK as a signatory from free trade
agreements, and determine under which rules UK airlines could operate flights to and
from EU destinations. As a former UK judge at the European Court of Justice, Sir
David Edward, has noted, there would likely be a long negotiation period as the UK
went about the “unravelling of a highly complex skein of budgetary, legal,
political, financial, commercial and personal relationships, liabilities and
obligations”.[1]

Moreover, it is not clear whether negotiations would include all necessary details
about a future UK–EU relationship. The Treaty states only that the agreement has to
‘take account of the framework for the future relationship the country will have
with the Union’, but it has been argued that it is not in itself a renegotiation
agreement for a new relationship. Instead, the UK might have to negotiate a separate
agreement to set out its new relationship after the exit was completed, with details
depending on the chosen alternative.

But it is what might happen next that would be important as the UK tried to redesign its relationship with the
EU, and what that would mean for its global future. Businesses care about how any alternative would impact on the economic factors that boost UK competitiveness and productivity and the UK’s ability to shape these factors in its interests. Only by looking at these details and answering the questions posed can the credibility
of an alternative for British business be determined.

All alternatives must be measured on the degree to which they:

1

Support openness and productivity by enabling businesses to trade with both
Europe and the rest of the world, based on the six aspects of openness analysed in
Chapter 3

2

Enable the UK to be an influential player setting the rules and standards
British businesses must follow

3

Address the risks of leaving, including any up-front costs, the political and
economic impacts of a period of dislocation, the likelihood of the alternative and
its long-term sustainability.

It must also be considered how the EU might change upon a UK departure, as the
grouping of member states in the EU Council which supports liberal free trade
policies loses a powerful member and the balance may shift away from the free trade
end of the spectrum.

Exhibit 64: The UK’s financial services sector would be damaged if the UK left the
EU, hampering business growth

Businesses right across the EU have benefitted from having a world-class financial
centre inside the Union. While the City of London would survive in some form were
the UK to leave, remaining in the EU – while using UK influence to impact its
future, focus its policy approach to financial services and ensure Eurozone
integration does not hit the UK’s financial sector disproportionately – remains the
best option for the British financial services sector to flourish.

Although it is difficult to make conclusive judgements on the impact of UK withdrawal
on the UK’s financial services, it is possible to outline some of the potential
impacts.

A number of companies would be likely to relocate parts or all of their operations

A number of foreign financial services companies are located in the UK to get the
benefits of being part of a world-class financial centre combined with the benefits
of the EU’s Single Market. After a UK withdrawal, the UK would lose aspects of its
attraction as a financial centre.

While far from every firm would leave, companies for which the benefits of the EU are
crucial for their investments in the UK would move operations, in part or in full,
to a financial centre within the EU. In a City UK report, decision-makers
specifically cited access to markets in the EU as a core reason for choosing the UK
over other financial centres in over 40% of the UK-positive investment cases
considered. European banks, currently holding 17% of total assets of banks in the UK
(nearly £1.4 trillion), would have a particular incentive to move back home.
[57]

Leaving the EU could force some firms to relocate to the continent: in particular,
European firms could relocate ‘back home’, as could foreign firms which depend on
the deep access to the EU that membership provides. As Goldman Sachs said in the
Evening Standard, it could leave its trading desk in London but most of
its employees would move to the Continent to secure the benefits.[58]

The sector could lose certain types of financial activities

In the medium to long term, with the UK outside the European Union, particular areas
of trade would be likely to move from London, some potentially to other financial
centres such as New York or Singapore and others within the Eurozone as rival
capital markets inside the currency area could emerge.

The European Central Bank would be likely to push through rules securing that
clearing of euros happened only within the EU (see Exhibit 62 in Chapter 5),
undoubtedly harming the City. euro trading in the UK has increased nearly fourfold
over the past decade with twice as many euros traded in London today than in all the
euro-area countries combined, while average daily turnover in the UK in
euro-denominated over-the-counter (OTC) interest rate derivatives totalled 8bn in
April 2011, accounting for 62% of all such trading worldwide and representing a
sixfold increase over the past decade.[59]

The UK would lose its regulatory influence and reduce its ability to be a place
to do global business

London’s place as a global financial centre rests partly on its position at the
crossroads of the competing regulatory regimes of the US and EU, which allows it to
be the place where global business can take place. The importance of the UK’s
regulatory influence in financial services is twofold. First, it allows the UK to
shape EU rules to keep the UK (and Europe) competitive in the face of global
competition from East and West. But perhaps more importantly – over the past 20
years but especially in the aftermath of the financial crisis – the UK’s position in
the EU and subsequent regulatory influence has helped avoid regulatory divergence
with other important regulatory regimes, most notably the US. This keeps regulation
broadly ‘global’, minimises the expensive regulatory duplication that occurs with
divergent regimes, and has allowed the UK to emerge as the modern economy’s global
financial centre. Maintaining this position is therefore based in part on retaining
the UK’s ability to develop market-leading regulatory standards that are globally
competitive. Outside the EU, the UK would lose its influence on EU policymaking on
financial services issues, which would potentially reduce the importance of London
as a global financial centre.

Withdrawal from the EU would hit UK financial services, broader business and the
wider economy

The impact of UK withdrawal would harm the financial services sector; London would
still be a financial centre but would have to make substantial changes to retain its
global role and European footprint. It would also hit the wider UK economy: around
40% of the tax take from UK financial services is from international businesses
operating in the UK, and their exit would also reduce sources of finance for the
broader business community.

The issues would not be addressed by an FTA

A UK–EU FTA could attempt to offset some of these disadvantages by including market
access for financial services as a key element in negotiations. However, market
access – in particular the type of access that passport regimes provide – is
unlikely to come without obligations on the regulatory side, including the likely
adoption of EU rules without any ability to influence these.

The EU could be willing to deem the UK’s regulatory regime ‘equivalent’ to its own
but, following the financial crisis, the distrust in the UK as a suitable regulator
for financial services could lead to EU demands for full UK compliance with EU
rules, for instance on bankers’ bonuses or capital requirements. Moreover, future EU
rules would no longer be developed with UK participation, potentially making them
less liberal and favouring the ‘continental’ model.

The lack of free movement of people would hamper business

In a UK–EU FTA scenario, there would no longer be free movement of people across
borders. Businesses would lose the ability to plug skills gaps and draw talent from
across the European labour market. The only provisions related to the movement of
persons in a conventional FTA would be for temperately movements of staff, whereby
the UK and EU would agree to the amount of time that intra-corporate transferees,
seasonal workers and business visitors can spend in another country in the context
of providing a service in another country.

The UK government would have more control on migration numbers from the EU in this
scenario, although it should be noted that, if any new work permit or visa
requirements were applied by the UK government on EU nationals, then they are also
likely to be applied as a reciprocal measure by the EU to the detriment of any UK
citizens seeking to work in, or UK companies seeking to post employees to, the
EU.

Even the best-case UK–EU Free Trade Agreement fails to deliver for British business
in supporting its global ambitions

The ‘UK option’ is the most difficult to evaluate since it has no existing ‘model’ to
assist the analysis. Its composition is highly uncertain because a deal with the EU
depends on what the remaining member states would be willing to negotiate with a
withdrawing UK.

The analysis nevertheless shows that the likely outcome is not one of costless
benefits. The quality of the FTA depends on negotiations with the EU and, although
the UK would undoubtedly have some clout, the UK’s negotiating hand is less than
that of the EU because of the relative dependence of each on the other. Any rights
of access granted would come at a price, with considerable regulatory compliance
being required in return for market access. The inability to shape these rules given
the loss of representation in EU institutions that would occur is a significant
downside to any deal for business. This is not least because the UK’s complex modern
economy relies on setting the rules of the game if it is to pursue a global future –
from rules governing financial services, through intellectual property and patent
law, to regulations designed to take on the common challenge of climate change.

The option would enable the UK to pursue an independent trade agenda, but that is no
guarantee of increasing on-the-ground market access for business around the world,
in either developed or emerging markets. Missing out on the benefits of potential
upcoming deals with developed markets such as the US and Japan would be a blow.
Moreover, the coverage of any bilateral UK FTAs is likely to be narrower in scope
than if the UK were negotiating within the EU, severely limiting the ability of the
UK to break down those non-tariff barriers that are, in reality, the practical
obstacles for UK businesses to harnessing global trends and seizing new market
opportunities around the world.

With the high risks and uncertainty relating to this model – as well as very little
evidence of advantageous outcomes compared to the existing model – the UK should
look to improve the existing package it holds as an EU member rather than embark on
trying to draft an alternative UK–EU agreement.

"

Market access is unlikely to come without obligations on the regulatory side,
including the likely adoption of EU rules without any ability to influence them.

6.2 Irrespective of which type of alternative relationship is chosen, a UK
withdrawal risks creating a more inward-looking EU

Withdrawal from the EU means the UK leaving the table where the future of Europe is
decided. The UK would lose most of the tools for influencing the policies of the EU
and its path of integration. This matters because, as outlined in Chapter 1,
economic fundamentals dictate that the British economy will need a trading
relationship with its European neighbours regardless of UK membership status.
Co-operation with the EU is necessary in most areas and, at the very least, British
exporters are dependent on sales to EU markets for which they must meet EU
regulatory conditions.

It is therefore important for the UK that the EU continues to remain an open market
for goods and services from third countries, that it pushes for new trade deals and
that it creates effective and efficient rules. In many ways a result of UK
influence, the EU today is a liberal market economy with the Single Market at its
heart.

"

Were the UK to leave, the EU may potentially move towards a more inward
looking posture, to the detriment of its openness to the world – with the
result that EU trade deals would likely be less ambitious.

Were the UK to leave, the EU may potentially move towards a more inward-looking
posture, protecting its own industries to the detriment of openness to the world –
with the result that EU trade deals would likely be less ambitious. At the moment,
both the ‘northern bloc’(Germany, the UK, the Netherlands, the Czech Republic,
Sweden, Denmark, Finland, Ireland, Latvia and Estonia) and the Mediterranean block
(France, Italy, Spain, Greece, Portugal and Cyprus) have a permanent blocking
minority in the Council of Ministers. If the UK left, however, the northern bloc
would lose its blocking minority, with a far greater risk of it being outvoted on
trade and EU budget issues (see Exhibit 65).

Exhibit 65: The ‘northern bloc’ of liberal market economies would lose their majority
were the UK to leave the EU[60]

A more inward-looking EU could reverse progress made on the Single Market and
introduce new tariff barriers for third countries. This is why representatives from
other member states have emphasised the importance of having the liberal-minded UK
in the club. In a Policy Network report for the CBI, a senior Swedish official said
that “it is difficult to see how the EU could be open and dynamic without the UK”.[61]

6.3 No alternative form of relationship with the EU offers a better global future
for UK business than full membership

The UK would undoubtedly survive outside the EU, but the assessment of five potential
alternatives to full UK membership has shown that none of them is able to improve
the overall balance of advantages and disadvantages to EU membership.

All alternatives mean a significant period of dislocation while the UK renegotiates
with not only the EU but every existing partner in a Free Trade Agreement. All
options except the EEA option offer unsatisfactory access to European markets. They
would involve one or more barriers to trade – such as higher tariffs, burdensome
rules of origin, border controls or other regulatory barriers – which would hit UK
goods trade with the EU for both exporters and importers, and undermine the UK’s
services sector’s ability to continue its increasingly important contribution to UK
export performance.

"

Full membership of the EU is a better vehicle for harnessing the global
trends reshaping the world economy than all the alternative options put forward.

This reduction in market access would not necessarily offer a substantial reduction
in the rules the UK would have to apply. Most of the major regulations currently
viewed as burdensome would continue to apply were the UK to leave. Most crucially,
the UK would also lose its influence over the creation of these rules and over the
global standards that the EU, as the world’s largest Single Market, helps to shape.
UK global competitiveness rests, in part, on ensuring that businesses from around
the world are playing by the same rules, and the loss of influence felt on exit
would affect the ability of UK business to take advantage of its strengths on the
world stage.

Full membership of the EU is a better vehicle for harnessing the global trends
reshaping the world economy than all the alternative options put forward. If the
form the UK’s current relationship takes is the best option, then working to improve
this – changing the details rather than the type of relationship –
through co-ordinated reform with other member states in the EU must be the priority
to help the UK realise its global future. The UK business community’s priorities for
reform are set out in the conclusion to the report.

References

[1] House of Commons Library, Leaving the EU,
Research Paper, 1 July 2013

[2] House of Commons Library, ‘The economic
impact of EU membership on the UK’, September 2013

[22] Economisuisse, ‘40th Anniversary of
the free trade agreement between Switzerland and the EU’, 2004

[23] Pascal Sciarini, Cédric Dupont and
Omar Serrano, Which future for Switzerland's bilateral strategy towards the
European Union? A qualitative comparative analysis of agenda-setting, The
Graduate Institute of Geneva, Centre for Trade and Economic Integration, Working
Papers, 2010

[24] Clive Church, Dr Paolo Dardanelli and
Sean Mueller, Implications for the UK Financial Sector of a ‘Swiss Model’ of
relations with the European Union, Centre for Swiss Politics, University of
Kent, January 2013

[30] European Voice, Switzerland seeks to
limit number of EU workers, 27 March 2013; and Manon Malhere, Free movement of
persons: Swiss victims of own success, Europolitics special issue on
Switzerland, 20 April 2012

[31] European Commission, METRIS -
Monitoring European Trends in Social Sciences and Humanities –
Switzerland Funding system European and international funding, 10 October 2013.

[32] Switzerland Department of Economic
Affairs website, ‘Research’, available at

[33] Swiss Confederation, Federal
Department of Home Affairs and State Secretariat for Education and Research,
Effects of Swiss participation in EU Research Framework Programmes Interim
report, 2009, 2010

[37] The Ankara Agreement of 12
September1963 (OJ L 217, 29.12.1964) and its Additional Protocol of 23.11.1970
(OJ L 293, 29.12.1972) define the scope and content of the association
relationship, while the final phase of the customs union is defined in Decision
1/95 of the Association Council of 22 December 1995 (OJ L 35, 13.02.1996).

[38] Felicitas Nowak-Lehmann et al., The
Impact of a Customs Union between Turkey and the EU on Turkey’s Exports to the
EU, Journal of Common Market Studies, 2007, Volume 45.